Some Thoughts Occasioned Upon Recent Fatherhood

Friends, I’m very happy to report that my daughter and firstborn child recently arrived into this world. The acute feelings of anxiety and then great relief at the birth itself slowly become replaced with the pleasant slight haze of the everyday. But since this journal is as much for myself as for my readers, I wanted to write down the thoughts I recall before they slip away.

Most people are more alike than they think. This is part of the reason why most heartfelt sentiments - whether joy at birth, sadness at the death of a loved one, celebration of someone’s birthday, and many others – end up sounding like clichés. The more important something is, oddly the more likely your feelings are similar to everyone else’s. Because of this, sometimes the repeated forms are okay for the important sentiments. As a friend’s priest said about Christmas sermons – if you’re hearing anything genuinely new in it, it’s probably heresy.

I learned this the hard way when emailing friends about the birth. I said something about how she’d been sleeping well and eating a lot so far, and joked that one could obviously extrapolate this out indefinitely. From one or two slightly snarky responses, I realized too late that, even in jest, this is a little like the newborn equivalent of those ghastly “My child is on the honor roll at XYZ Elementary” bumper stickers, but for a much more emotionally fraught subject. (Which painful door would you rather open? “I’m a bad parent” or “My beloved child is just difficult, and experiencing misery that I can do nothing about”? Por que no los dos!) I’ve refrained from bring up the subject since then, and just instead reflect on the ancient Greek observation that no man should be declared happy until he is dead. You have a well-behaved child once they’re married with children of their own. 

Nonetheless, there was one part about my wife’s period of late pregnancy and birth that was quite striking, in a way that I wasn’t expecting.

There is a certain level of narcissism and egocentrism that is inherent to everybody. The way the Last Psychiatrist put it is quite memorable:

“The essence, the defining characteristic of narcissism is the isolated worldview, the one in which everyone else is not fully real, only part a person, and only the part the impacts you.”

I, like a lot of people, always wake up in my dreams just as I’m about to die. There is some fundamental stumbling block that cannot quite comprehend a world without me in it. If the only part of everything else that is real is the part that interacts with you, then your death is literally the end of the universe.

This much gets commented on quite a lot. One can intellectualise death, and imagine the world going on without you. But one cannot really feel it. It just doesn’t compute.

But the strange part, that I hadn’t really  appreciated, is that something similar happens (at least to me) at the early end too.

Having my own child was literally the first time I’d been forced to contemplate in concrete detail what my parents’ life might have been like around the time I and my siblings were first born. The standard way this is described is that until one has children oneself, one doesn’t quite realise how much thankless work goes into changing thousands of nappies and not sleeping properly for months on end.

But at least for me, it’s more than that. I just hadn’t given much thought to the subject. I have images of my parents’ life before me, pieced together from photographs, and stories they’d tell with my uncle sitting around the dining room table after dinner. But these tended to mostly focus on the period when they first met, before they got married. There were some stories after that, about their lives, living with my grandmother, buying a small shack in the countryside and planting trees there, and things like that. But then there was a large gap, a chunk of the map shrouded in cloud, of what it might have actually felt like when we children were first born.

And I think part of the reason for this (at least with me) is the narcissistic tendency. People are only real to the extent they interact with you. And the part of you that counts is the part you can remember. In my case, the earlies memories are from around age 3. When I’m forced to contemplate it, I simply have no empathetic concept of me before that time. To consider myself as a one-year old, or as a newborn breast-feeding, or while in the womb, is every bit as alien to the actual narcissistic self-conception as to think of myself as being dead. I can imagine it. But there is simply no capacity to relate. Without memory and capacity for self-conception, the chain of "I"-ness gets broken. 

Take away this inherent interest and understanding, and the parts of the characters immediately before I mentally appear on the scene simply don’t quite register. The stories my parents explicitly told me register, and those I feel warmly about. And indeed, I can think about times before I was even an idea, what my parents were like as children or teenagers. But the part that interacts with me, in the period where “me” is not something I instinctively empathise with, tends to be a strange and glaring gap.

Until my own child arrives. Then, I'm forced concretely to imagine all sorts of things I didn’t really consider. The scene of sea and sky suddenly inverts to a dizzying new perspective - one in which my parents are fully real, but I am only partially real, and only the part that interacts with them (since the part that is "me" doesn't yet exist). And one sees the whole path of the same scene repeating again and again. My daughter, currently totally helpless, having not the vaguest clue of what my wife and I do to keep her alive, and no real sense of gratitude or even contemplation, until one day, several decades hence, when (hopefully!) her own time comes to pay it forward with her own children, and the cycle repeats.

Thank you, Mum and Dad. At last, just a teensy bit, I understand. I suspect you knew this already.

Welcome to the world, little one. We’re so glad to have you.

Tether - risky, but probably not for the reasons they keep telling you

I keep being forwarded this article that came out in Medium recently. It poses as a big expose of tether, the stablecoin that powers lots of cryptocurrency transactions. We learn that it's a scam and a fraud, and about to crash the price of bitcoin.

The very short tl;dr on tether is that it's a cryptocurrency whose value is kept at a stable $1 USD. Why would you want this? Well, lots of people want to transact electronically in something that's basically dollars, but without the insanely anachronistic mess that is the actual US banking system. But USG has aggressively gone after money laundering by controlling the interface of the banking system and crypto exchanges. In other words, control the fiat/crypto interface tightly, and the rest of legal compliance will follow (apparently). If you as a company anywhere in the world take money from the banking system, you get aggressive demands from USG officials that you comply with US "Know-Your-Customer" (KYC) anti-money-laundering legislation. 

So some exchanges like coinbase specialize in being places that comply openly with the law, where you can hold your crypto and feel like there's a lower chance that it will be stolen, because coinbase is possibly about to become publicly listed, a good hallmark of establishment reliability. And others specialize in the opposite of this - transact there while being less legible to US regulators, take on massive leverage on your trades, pay lower fees due to regulatory arbitrage of not complying with US financial laws. So far, they've been able to do this, barely, because they follow the golden rule of "never touching actual US dollars". Just exchange one digital asset (e.g. bitcoin) for another (e.g. tether), and you never directly interact with the standard financial system. So tether ends up being the numeraire good, the medium of exchange on lots of these platforms. Hence why there's so much demand for it.

It's important to note that the way tether is priced at a dollar is that tether, the company, will (so far!) redeem them for exactly a dollar. As long as this promise is viewed as credible, they'll trade at $1, and they roughly do. Tether rather speaks out of both sides of its mouth on this - in marketing materials they tend to emphasize that tethers can be redeemed for the same number of dollars, and in practice they pay out your redemptions, but in the fine print they say that this isn't necessarily, technically, something promised.

So far, so good.

Well, what's the claimed problem? Here's the article's summary:

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019.

As an aside, the Office of the Attorney General for the Southern District of New York are a pack of assholes who feel justified in arresting anybody on the planet who so much as looks at a financial transaction in a way they don't like, on the highly compelling theory that a) Manhattan has a lot of banks, and b) Manhattan is the center of the universe. If you are not utterly cynical about their press releases by now, I don't know what to tell you. 

And from there follows a very breathless and interesting read of all the ways that tether has been printing tether coins, and this is pumping up the price of bitcoin, and it's all likely to collapse because it's a giant scam. 

 "Nonetheless, based on this evidence, I concluded my risk was now too great. I was long Bitcoin up to my eyeballs; Bitcoin was clearly correlated with Tether; Tether was clearly being issued at a frantic rate; and that issuance had a high probability of being backed by nothing at all."

Have a read. There are a lot of interesting facts in there. In fact, if you feel yourself well versed in finance, go away and read the article and try and find the big glaring conceptual error in it, then come back.  

I am in two minds about this article. 

On the one hand, the author is likely right that tether has a non-trivial chance of being shut down by USG, that it fuels a large amount of leveraged trades in crypto, and that the loss of tether would likely cause a big deleveraging that would probably be disastrous for bitcoin prices

On the other hand, the reasons he thinks this will happen are moronic, ludicrous and risible. They are a great example of a certain kind of stupidity that is annoying prevalent in crypto communities. 

What is the first order problem with the whole discussion?

The gigantic blind spot is that he, like lots of crypto people, seems to not notice the obvious fact that tether is simply a bank. The tether coin itself is a demand deposit, just transformed into cryptocurrency form. It's hard to think of a cleaner example of the hypothesis that money itself started as debt that began to circulate. The company keeps a certain amount in reserves to fund these possible redemptions, and then invests the rest. This is how basically every bank in the world works.

The reason that so few people spot this is that the world is roughly partitioned into 

-people who like cryptocurrencies and who think that all "fractional reserve banks" are scams, and

-people who like mainstream banking, and think that cryptocurrencies are scams.

So as a result, the number of people who are both knowledgeable and agnostic on both fractional reserve banking and crypto is surprisingly few. 

And when you see it this way, a huge amount of the apparent mysteries immediately get resolved. This comparison ought to be obvious, but it’s not, because guys like this tend to have completely moronic ideas about what a bank actually is, and simply think that all banks of any form are “scams”, regardless of how well capitalized they are. He has some huge hard-on of this idea of himself as the narrator in the Big Short, but somehow never learned how a bank actually works. 

Go back to the quote above. Banks are partitioned into two types. Those where every dollar of deposits is backed by 100% literal cash US dollars in a vault, and those where it is “backed by nothing at all.”

Like…did you consider any other possible bank balance sheets? Are these the only two possible cases? 

His idealized type of bank (assuming he even realizes that this is what he's describing, which I doubt) is called a narrow bank. In practice you should be able to set up a bank that just takes investors deposits, in turn deposits them at the Fed, and earns the interest the Fed pays on reserves. Why can't you do that? Well, the Fed has denied licenses to such banks, with largely spurious reasons given as to why, in ways that smell like corruption, even to very mainstream economists like John Cochrane.

So since we don't have that option, every bank is a fractional reserve bank. To a banking agnostic, the crucial question is not "is it a scam engaged in maturity transformation?". Rather, the question is "given how well capitalized the bank is, how likely is it that there will be a bank run that causes depositors to not get paid back in full?".

Suppose tethers are only backed 74 cents in the dollar by actual USD, a claim that’s floated around here. Here’s the question. They took in 100 cents in the dollar in cash. They now hold 74 cents. What does this guy think they did with the remaining 26 cents? Blew it all on coke?

No, what they very likely did is buy the exact cryptocurrencies that the guy laboriously shows that tethers are being used to purchase.

So at the time they bought it, their portfolio was most likely something like 74c cash, 26c BTC or whatever.

Now, a sensible risk weighting would assign a big haircut to these BTC assets, given how risky they are. Sure. But what this guy does, along with places who should know better like Bloomberg, is downweight every single asset that's not cash to a risk-weighted collateral value of zero. This is, to not put too fine a point on it, imbecilic. 

And the reason this is even more egregious is the following. Ex post, what happened to the price of that BTC? It went up like crazy. 

Assuming this much is roughly true, this would make tether among the best capitalized banks in the world. As a betting man, I’d wager pretty strongly that the value of their crypto is way higher than the missing 26c in the dollar or whatever of liabilities they owe, probably by a factor of 2-10.

Buddy, if you think tether is a scam, let me tell you about Citibank. 

So what do you do if you’re now a bank who's crazily over-capitalized, and holding a lot of crypto assets? Well, one option is to say “sod it, let’s print some more tether liabilities, and use those to buy more crypto”.

Absent government regulations, this is an entirely sensible thing to do. The timeline above explains every single “suspicious” fact that this guy points to.

The risk that tether, left to its own business operations, is about to go bust, seems quite low, as long as they’ve likely been using part of their cash to purchase crypto that’s since risen greatly in price. It's true, there hasn't been a proper audit, so we don't know for sure what they've been buying or holding. Maybe they really have just spent it all on hookers. But the strongest bet to me, for a variety of reasons (including those floated by tether skeptics) is that tether has been buying crypto assets. If they've bought some kind of diversified crypto portfolio before March 2020, happy days. Strongly well-capitalized banks do not tend to collapse in bank runs. I would wager quite heavily that, at current prices, they have way more crypto assets than they need to pay off every possible tether holder (even if, as is true, liquidating said assets all at once would cause a big price drop).

So what’s the actual problem with tether?

First, while they are a bank, they don’t say they’re a bank. They tend to imply, falsely, that they’re more like a money market fund, just holding cash and cash equivalents.

Second, if they are a bank, they run the risk of being regulated like a bank, and they sure as hell haven’t been complying with banking regulations, notwithstanding that they’re probably very well capitalized.

Third, their whole business model smells like know-your-customer violations.

All of this means that there’s a decent chance of them getting boned by some up-and-coming NY DA, running the same playbook as for Tradesports, and World Star Poker, and a bunch of others. Freeze assets. Destroy your business because you can't access any of your assets. You dip into some of the reserve cash to stay afloat. They declare you a ponzi scheme, improperly stealing customer funds, and say you collapsed for this reason. Whether you were or weren’t (and in the case of tether, there’s good reasons to think they have more assets than they need, not less), the proximate cause of the collapse is government.

Where this guy is right, is that tether fuels a lot of the levered bets people make on dodgy exchanges. Take away the tether that fuels these exchanges, and you probably get a massive deleveraging. I’d bet on this being a Mt Gox level event for BTC if it happens. If the only demand is now coming from unlevered, KYC compliant bets on Coinbase, that’s a big reduction in likely demand.

At the end, the big irony is that

a) he's right that you should be worried about tether, about the prospect of it being closed down, and the likely impact of this on BTC prices, but

b) the one thing tether gets the most flack for is the one bit that seems least likely to be true - being massively undercapitalized, and unable to pay back depositors.